Market forces

Copyright © 2004 South-Western

The Market Forces of Supply and Demand


• Supply and demand are the two words that economists use most often.

• Supply and demand are the forces that make market economies work.

• Modern microeconomics is about supply, demand, and market equilibrium.


• A market is a group of buyers and sellers of a particular good or service.

• The terms supply and demand refer to the behavior of people . . . as they interact with one another in markets.

MARKETS AND COMPETITION


MARKETS AND COMPETITION

• Buyers determine demand.

• Sellers determine supply


Competitive Markets

• A competitive market is a market in which there are many buyers and sellers so that each has a negligible impact on the market price.


• Perfect Competition• Products are the same• Numerous buyers and sellers so that each has no

influence over price• Buyers and Sellers are price takers

• Monopoly• One seller, and seller controls price

Competition: Perfect and Otherwise


• Oligopoly• Few sellers• Not always aggressive competition

• Monopolistic Competition• Many sellers• Slightly differentiated products• Each seller may set price for its own product

Competition: Perfect and Otherwise


DEMAND

• Quantity demanded is the amount of a good that buyers are willing and able to purchase.

• Law of Demand• The law of demand states that, other things equal,

the quantity demanded of a good falls when the price of the good rises.


The Demand Curve: The Relationship between Price and Quantity Demanded

• Demand Schedule • The demand schedule is a table that shows the

relationship between the price of the good and the quantity demanded.


Demand Schedule


The Demand Curve: The Relationship between Price and Quantity Demanded

• Demand Curve • The demand curve is a graph of the relationship

between the price of a good and the quantity demanded.

Figure 1 Demand Schedule and Demand Curve


Price ofIce-Cream Cone

0

2.50

2.00

1.50

1.00

0.50

1 2 3 4 5 6 7 8 9 10 11 Quantity ofIce-Cream Cones

3.00

12

1. A decrease in price ...

2. ... increases quantity of cones demanded.


Market Demand versus Individual Demand

• Market demand refers to the sum of all individual demands for a particular good or service.

• Graphically, individual demand curves are summed horizontally to obtain the market demand curve.


Shifts in the Demand Curve

• Change in Quantity Demanded• Movement along the demand curve.• Caused by a change in the price of the product.


0

D

Price of Ice-Cream Cones

Quantity of Ice-Cream Cones

A tax that raises the price of ice-cream cones results in a

movement along the demand curve.

A

B

8

1.00

2.00

4

Changes in Quantity Demanded



• Consumer income

• Prices of related goods

• Tastes

• Expectations

• Number of buyers



• Change in Demand• A shift in the demand curve, either to the left or

right.• Caused by any change that alters the quantity

demanded at every price.

Figure 3 Shifts in the Demand Curve

Copyright©2003 Southwestern/Thomson Learning

Price ofIce-Cream

Cone

Quantity ofIce-Cream Cones

Increasein demand

Decreasein demand

Demand curve, D3

Demandcurve, D1

Demandcurve, D2

0



• Consumer Income• As income increases the demand for a normal good

will increase.• As income increases the demand for an inferior

good will decrease.


3.00

2.50

2.001.501.00

0.50

21 3 4 5 6 7 8 9 10 1211

Price of Ice-Cream Cone

Quantity of Ice-Cream Cones

0

Increasein demand

An increase in income...

D1D2

Consumer IncomeNormal Good


3.002.50

2.001.501.00

0.50

21 3 4 5 6 7 8 9 10 1211


Quantity of Ice-Cream

Cones0

Decreasein demand

An increase in income...

D1D2

Consumer IncomeInferior Good



• Prices of Related Goods• When a fall in the price of one good reduces the

demand for another good, the two goods are called substitutes.

• When a fall in the price of one good increases the demand for another good, the two goods are called complements.


Solve

• Ketchup is a complement for burgers. If the price of burger rises, what happens to the market for ketchup? For tomatoes? For tomato juice? For orange juice?


SUPPLY

• Quantity supplied is the amount of a good that sellers are willing and able to sell.

• Law of Supply• The law of supply states that, other things equal, the

quantity supplied of a good rises when the price of the good rises.


The Supply Curve: The Relationship between Price and Quantity Supplied

• Supply Schedule• The supply schedule is a table that shows the

relationship between the price of the good and the quantity supplied.


Supply Schedule


The Supply Curve: The Relationship between Price and Quantity Supplied

• Supply Curve• The supply curve is the graph of the relationship

between the price of a good and the quantity supplied.

Figure 5 Supply Schedule and Supply Curve


Price ofIce-Cream

Cone

0

2.50

2.00

1.50

1.00

1 2 3 4 5 6 7 8 9 10 11 Quantity ofIce-Cream Cones

$3.00

12

0.50

1. Anincrease in price ...

2. ... increases quantity of cones supplied.


Market Supply versus Individual Supply

• Market supply refers to the sum of all individual supplies for all sellers of a particular good or service.

• Graphically, individual supply curves are summed horizontally to obtain the market supply curve.


Shifts in the Supply Curve

• Input prices

• Technology

• Expectations

• Number of sellers



• Change in Quantity Supplied• Movement along the supply curve.• Caused by a change in anything that alters the

quantity supplied at each price.


1 5


Quantity of Ice-Cream Cones0

S

1.00A

C$3.00 A rise in the price

of ice cream cones results in a movement along the supply curve.

Change in Quantity Supplied



• Change in Supply• A shift in the supply curve, either to the left or

right. • Caused by a change in a determinant other than

price.

Figure 7 Shifts in the Supply Curve


Price ofIce-Cream

Cone

Quantity ofIce-Cream Cones

0

Increasein supply

Decreasein supply

Supply curve, S3

curve, Supply

S1Supply

curve, S2


Solve

Over the past 20 years, technological advances have reduced the cost of computer chips. How do you think this has affected the market for computers? For computer software ? For typewriters?


SUPPLY AND DEMAND TOGETHER

Equilibrium refers to a situation in which the price has reached the level where quantity supplied equals quantity demanded.



• Equilibrium Price• The price that balances quantity supplied and

quantity demanded. • On a graph, it is the price at which the supply and

demand curves intersect.

• Equilibrium Quantity• The quantity supplied and the quantity demanded at

the equilibrium price. • On a graph it is the quantity at which the supply and

demand curves intersect.


At $2.00, the quantity demanded is equal to the quantity supplied!


Demand Schedule

Supply Schedule

Figure 8 The Equilibrium of Supply and Demand


Price ofIce-Cream

Cone

0 1 2 3 4 5 6 7 8 9 10 11 12Quantity of Ice-Cream Cones

13

Equilibriumquantity

Equilibrium price Equilibrium

Supply

Demand

$2.00

Figure 9 Markets Not in Equilibrium


Price ofIce-Cream

Cone

0

Supply

Demand

(a) Excess Supply

Quantitydemanded

Quantitysupplied

Surplus

Quantity ofIce-Cream

Cones

4

$2.50

10

2.00

7


Equilibrium

• Surplus• When price > equilibrium price, then quantity

supplied > quantity demanded. • There is excess supply or a surplus.

• Suppliers will lower the price to increase sales, thereby moving toward equilibrium.


Equilibrium

• Shortage• When price < equilibrium price, then quantity

demanded > the quantity supplied. • There is excess demand or a shortage.

• Suppliers will raise the price due to too many buyers chasing too few goods, thereby moving toward equilibrium.

Figure 9 Markets Not in Equilibrium


Price ofIce-Cream

Cone

0 Quantity ofIce-Cream

Cones

Supply

Demand

(b) Excess Demand

Quantitysupplied

Quantitydemanded

1.50

10

$2.00

74

Shortage


Equilibrium

• Law of supply and demand• The claim that the price of any good adjusts to bring

the quantity supplied and the quantity demanded for that good into balance.


Three Steps to Analyzing Changes in Equilibrium

• Decide whether the event shifts the supply or demand curve (or both).

• Decide whether the curve(s) shift(s) to the left or to the right.

• Use the supply-and-demand diagram to see how the shift affects equilibrium price and quantity.

Figure 10 How an Increase in Demand Affects the Equilibrium


Price ofIce-Cream

Cone

0 Quantity of Ice-Cream Cones

Supply

Initialequilibrium

D

D

3. . . . and a higherquantity sold.

2. . . . resultingin a higherprice . . .

1. Hot weather increasesthe demand for ice cream . . .

2.00

7

New equilibrium$2.50

10

Figure 11 How a Decrease in Supply Affects the Equilibrium


Price ofIce-Cream

Cone

0 Quantity of Ice-Cream Cones

Demand

Newequilibrium

Initial equilibrium

S1

S2

2. . . . resultingin a higherprice of icecream . . .

1. An increase in theprice of sugar reducesthe supply of ice cream. . .

3. . . . and a lowerquantity sold.

2.00

7

$2.50

4

Table 4 What Happens to Price and Quantity When Supply or Demand Shifts?

Copyright©2004 South-Western


Solve

• Using Demand and Supply diagrams, show the effect of the following events on the market for personal computers

• A) The price of computer chips fall.

• B) There is a rise in computer incomes• C) The price of computer software rises• D) Universities require incoming students to have their

own personal computer


Solve

Suppose the price of movie tickets is determined by market forces. DD and SS are given as follows:

Price DD SS

4 10,000 8,000

8 8,000 8,000

12 6,000 8,000

16 4,000 8,000

20 2,000 8,000


1) Draw the dd and ss curves. What is unusual about this supply curve? Why might this be true.

2) What are the equilibrium price and quantity.

3) Suppose the new dd schedule isprice DD

4 4000

8 3000

12 2000

16 1000

20 0


• Add the old demand schedule and new demand schedule to calculate the new demand schedule . What will be the new equilibrium price and quantity.

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Market forces